The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.
What is a Market Crash and How Can You Trade It?
Dec 7, 2021
A crash in financial markets can be defined as a large fall in price in a short amount of time, but this definition leaves much to be desired for those looking to trade such an opportunity. What is a large fall from a historical data perspective? How often does this occur? Should you buy or sell?
SM75 \ Small Stocks Index
Market crashes can also be defined as downside movement outside of what is deemed normal or healthy; and, thankfully, what’s normal can be loosely defined by the standard deviation.
Standard deviations summarize historical price data into simple ranges that the data has stayed inside of with varying levels of confidence. For example, SM75’s 1 standard deviation of +/-0.99 tells you that the market has historically held within that range on a daily basis 68% of the time; and the market has held within +/-1.98 95% of the time and +/-2.97 99% of the time.
So, if the 3 standard deviation range of +/-2.97 reflects that market dropping by -$3 or more less than 1% of the time, then that might be a solid definition of what’s abnormal and thus a crash.
SM75 \ Standard Deviations
Historically, stocks have tended to rise the day following downside action outside of any standard deviation, but the greatest success has come in buying the crash. That said, this is a rare opportunity that presents itself only a handful of times annually, so any movement nearing 3 standard deviations lower could suffice.
SM75 \ Standard Deviations
Crash rhetoric finds its way into news feeds and conversations seemingly more often than crashes actually occur, but taking the time to define and act on them could yield profits in the future.
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Nov 15, 2021
Rumors started to swirl concerning the nomination for the next Federal Reserve Chairperson a little over a week ago.* Would President Biden nominate the current Fed Chair Jerome Powell for another term, or would he go to the more dovish Democrat Lael Brainard?
Jul 15, 2021
The stock market hasn’t sold off significantly since the early part of 2020, but it’s witnessed countless blips that have been bought up in the meantime. Could last week’s fall finally be the start of a crash? Sure! But how do you know if this is the time to sell stocks?
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